Why Facebook will rule the world—and why it won’t

Facebook is one of those sites that changed the internet—and Beaver—forever. It’s not even four years old, and it has only been open to high schools for two years. Yet in that time, it has become ubiquitous. Once it may have looked like a fad, a lightweight site letting friends share messages and photos. Now it stands at the brink of total world domination. Sort of.

In mid-May, 2007, Facebook unveiled the Facebook Platform. In doing so, it took a giant leap forward in becoming a major force on the internet. Facebook was now a platform just like Windows or your cell phone. It wasn’t merely an online application; it was a stage upon which any developer could build something new and exciting. This may have gone unnoticed by many longtime members, but suddenly, Facebook was gaining incredible popularity with tech-savvy adults beyond the student sector. In that sense at least, it was no longer a Xanga or MySpace. It was a Google.

Facebook has long looked like a prime acquisition target for companies like Google, Yahoo, and Microsoft. It made headlines in March 2006 by supposedly turning down a $750 million offer. At the time, that seemed generous; after all, MySpace (which dwarfed Facebook in user count, and still does) had sold for just $580 million. Facebook was reportedly holding out for a ridiculous-sounding $2 billion.

Things have changed. YouTube sold in October 2006 for $1.65 billion; suddenly MySpace seemed like a steal. Acquisition rumors continued, but founder Mark Zuckerberg wanted to keep the company independent. Still, speculation that Microsoft or Google would buy at least part of Facebook reached a new high last month. Sure enough, on October 24, the AP reported that Microsoft had landed a deal to buy 1.6% percent… for $240 million. (The deal also lets Microsoft serve all Facebook advertising worldwide.) Don’t feel like doing the math? All right: that values Facebook at $15 billion.

(Where’s the benefit to Microsoft? Many analysts saw this as a desperate move meant to just keep Facebook away from Google at all costs; one headline read, “Facebook Takes the Microsoft Money And Runs.” More on that later.)

The Facebook Platform was just the beginning. Armed with more cash than you or I would know what to do with, Facebook now wants to know everything you do.

And now, we move it to highly speculative territory.

All About The Ads

Google, it is often said, is not a web services company. It is an advertising company. Search, Gmail, Maps—it’s all just a way to keep your eyes on their ads. Advertising is how they make money.

“Making money,” once a staple of the business world, has been a tricky thing for some new internet companies. One might call it downright unimportant. In today’s climate, you can build something cool and make millions, even with negligible revenue and no monetization plan. People start businesses in the hopes of just selling out to Google. For a while, Facebook looked like it could be one of those companies. No longer. The fact that Microsoft only scooped up 1.6% is just further proof of that.

So how will Facebook make money? No, those $1 gifts won’t do it. It all comes down to advertising. And while traditional banner ads (like what Facebook currently runs) are all well and good, Facebook isn’t satisfied. Like Google, they know they have the chance to be an advertising platform unlike any other.

The key to attracting advertisers is information. Tons and tons of information. Google brought to the table unprecedented amounts of information. They know what you search for, what emails you get, what maps you look at. They can target ads extremely well, and thus sell ad space for much more money. They also provide invaluable information about the ads themselves: if people click on them, who clicks on them, when people click on them.

Now think about Facebook. Suddenly Google’s data about you seem trivial. The amazing thing about Facebook is that it merges reality and the internet. On Facebook, you’re not ILoveYoda235. You’re Toph Tucker. On Facebook, you don’t interact with whatever random Canadian happens to stumble upon your latest lip-synching video on YouTube. You interact with your real friends, from the real world.

And you share enormous amounts of information. Location, age, events, thoughts, photos, videos, favorite movies, and so on. Amazon.com is another site with fantastic information about you. Their product recommendations are eerily relevant already. Now imagine if everything could be brought together. According to one article, that’s what Facebook wants to do: unite their own information about you with information from various partners. Best ad network ever? You bet… and chances are, Microsoft’s in on it. (Incidentally, these items could also show up on your News Feed, if you let them—e.g., “Toph Tucker bought Transformers DVD at Amazon.com.” There’s also a chance that the plan could involve some form of revenue sharing with users.)

Now, don’t get paranoid. Facebook does its best to be enormously respectful of privacy. Take a nice long look at the Privacy page some time. What other web site gives you that level of control? With great power comes great responsibility; Facebook seems to take that to heart. As long as you pay close attention to those settings, you can make as much or as little information public as you want. So don’t think about this from your perspective. Make that page your best friend and don’t worry. Just think about this from Facebook’s perspective.

Checkmate?

Google, for one, has certainly given this plenty of thought. They are rarely beaten, and the fact that Microsoft got the Facebook deal was quite a surprise. They’re no dummies; they don’t want to be outmaneuvered.

So, six days after Facebook’s big deal with Microsoft, Google fought back with “OpenSocial.” The gist of it, in the context of this article, was that a dozen or so players in the social-networking field were teaming up on Facebook by coming up with a standardized system for developing applications and sharing data. Then, on November 1, MySpace joined the party, along with two other guys you don’t care about. Popular technology news site TechCrunch declared ‘checkmate.’

Suddenly, in a matter of days, Facebook seems to have gone from tech darling to social networking pariah. Association with Microsoft tends not to help your reputation in the blogosphere, and having Google so obviously target you is often the nail in the coffin.

But Facebook is resilient. Whatever deals Google makes with MySpace, the fact of the matter is that Facebook is now very firmly entrenched. It’s much harder to switch away from it than it would be to switch away from, say, Google, because there’s no easy way to transfer all your friends, photos, applications, message history, and so on. (With Gmail, at least you could archive your mail and export your contact list.) Facebook has the momentum.

(It’s also worth noting that the first OpenSocial application was hacked within 45 minutes.)

—and why it won’t.

So will Facebook rule the world? Will it know everything you do, and use that to target advertising like never before? Does it have the opportunity to unseat Google and control the entire internet?

Well, no. Not really. It’s a significant player to be sure, and it is certainly a threat Google (and anyone else that gets in its way). But these sorts of companies come and go. The only way to see how it’ll pan out is to wait.

Amazon.com, Google, MySpace, YouTube, Facebook—they’re all huge (especially Google + YouTube). But none of them rules the world. Indeed, Facebook has a long way to go before it even reaches the Amazon.com/Google level. It’s easy to forget that MySpace is still significantly larger, with 107 million unique visitors in September, compared to Facebook’s 73.5 million. Facebook has been gaining quickly, but OpenSocial very well might reverse that trend.

The next few weeks will probably say a lot about where all this is going. Facebook is poised to announce their advertising plans as early as Tuesday. The OpenSocial initiative is only just getting started, and it’s possible that Facebook itself could join at some point. If one thing seems clear, it’s that no one is even close to checkmate.

Update: 2 Dec. 2007

Sure enough, on November 7, Facebook launched a number of new features that more or less amounted to what was expected. It launched new advertising tools (though the ads only run on facebook.com, and Microsoft is uninvolved) and “Facebook Beacon,” which brings information from outside web sites into your News Feed. The features are taking a lot of heat–the ads for being cluttersome, and (even more so) Beacon for invading privacy.